Regulation and Productivity; J. Hospers

Private DepositInsurance Banks in a free society might choose to purchase privately supplied deposit insur ance as a way to reassure customers. They might also enter into interbank mutual aid agreements, or be insured through clearing houses. Historically, banks have used these and other methods to convey trust to cus tomers. Before deposit insurance banks would advertise their balance sheets and list the members of their boards of directors. Providingthis kind of information was a way to establish their trustworthiness to actual and potential depositors. With deposit in surance, banks need not do this. It is rea sonable to expect that banks in a free society will use these ways, and discover new and imaginative ones, of creating the trust on which all banking systems rest. Banks in a free society will be literally nothing special. What makes banking so unfree today is that banks are treated dif ferently from other business enterprises.

The rule of law that would characterize a free society would demand that banks be treated no differently than other firms. If they are fraudulent or use force, then they need to face the consequences. Otherwise, any sort of voluntary arrangement banks make with customers will be allowed. The result will not only be a more free banking system, but a more efficient, safe, and pro ductive one. D REGULATION AND PRODUCTIVITY by John Hospers P eople don't enjoy having their lives regulated, whether they are children rebelling against parental commands or adults whose actions are subject to legislaDr. Hospers, a Contributing Editor of The Free man, is Professor Emeritus ofPhilosophy at the University of Southern California. tion by government. Still, don't we need regulators with coercive power such as only government has? What would happen if everyone could, without penalty, forge checks, violate contracts, dump poisonous wastes into the soil, and manufacture cars that are accident-prone? The market some374 THE FREEMAN • JULY 1994 times regulates itself, but not always: people will often profit by causing injury and dam age to others.

The problem is that the watchdogs them selves are imperfect. They are vulnerable to bribery and corruption, and most of all, operate with gross inefficiency. Moreover, those who are entrusted with positions as watchdogs often have an inordinate desire to increase their own powers. Regulating others often gives them more satisfaction than their income does, and they spare no effort to keep on increasing their own reg ulatory powers. And often nobody watches the watchers. I shall present three examples, deliber ately taken from a diverse array of activities, to illustrate how this problem affects the business community. 1. Environmental Regulation Not many people set out to make their natural environment dangerous for human habitation, or desire to render entire species of living things extinct. Laws are enacted to inhibit those whose actions have this effect. Today, however, regulations have become so all-encompassing that no business and no landowner could long survive if all the regulations now on the books were strictly enforced. For example, there are countless underlings in the Departments of Interior and Agriculture who are empowered to say to farmers, "That mud puddle in your back field is hereby declared a wetland," thus making it no longer permissible for farmers to cultivate such land although they still continue to pay taxes on it.

Thousands of letters were sent out in 1993 from the Bureau of Reclamation of the Department of the Interior, informing the recipients that the Bureau intended to look for endangered species on their land. What if the landowner refused to permit such inspection? Then, since the absence of en dangered species could not be confirmed by inspection, uncultivated parcels would be labeled as habitat for endangered species. What happens if a piece of land is declared a habitat? Strict controls on use then come into play. "When the U.S. Fish and Wildlife Service had designated a habitat-study zone, one family lost $60,000 worth of production a year." 1 Since the zone is off limits to crops, a farmer cannot replant there. Moreover, banks no longer will make loans to buy such properties because they are aware that the buyer will not be able to use the land for planting crops. Congress passes a law; the "beef' in the law is the enabling clause which permits the regulatory agency to make whatever regu lations it deems necessary and proper to implement the law. Those who are subjected to the regulations must obey everyone, however trivial or burdensome, or else re ceive large fines or even jail sentences.

Usually the act is applied by its enforcers beyond the· scope of what was envisioned when the law was passed. Already every landowner is subject to the intricately de tailed provisions of the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Endangered Species Act, the Na tional Environmental Policy Management Act, and so on. They are drowning under a flood of regulations, from which the only benefit may be to the regulators, keeping them in well-paid positions at the expense of the taxpayers. The mission of the national Biological Survey is "to catalog everything that walks, crawls, swims, or flies around this coun try." To do this their agents must be able to enter every parcel of land in the United States-not every decade, as with the cen sus, but on a continuous basis. "Landown ers fear that the net effect will be to transfer de facto control of thousands more acres to the federal government.,,2 2. Housing Regulations In past decades, prior to the massive interference of the federal government, in expensive housing was far less of a problem than it is today. Cheap rooms could be had, for a dollar or two a week, with no particular amenities and perhaps a bathroom down the hall shared by several tenants. 3 But in most REGULATION AND PRODUCTIVITY 375 cases American cities these "flop-houses"

facilities were torn down: "We can't have people living like that." The government tore down the building and built other ones at much higher cost. Most of those who had previously occupied these buildings could not afford the new ones. To limit the cost to tenants, rent control measures were initiated, but of course such controls only prevented new housing from being built, and massive shortages devel oped. Who wants to risk losing money on real estate in New York City? Landlords who can sell do so at a loss and get out. But rent control is only the most notorious form of regulation. In most states it is illegal to refuse to rent a room or apartment to someone because he or she is a welfare recipient: the ultimate threat of the renter whose every whim is not satisfied is "I'll report you to the Welfare Board and then you'll never be able to use your buildingsfor rental again!" It is a pervasive desire of landlords not to rent to welfare recipients; in general, owners say, they have little sense of responsibility; they are "all rights and no responsibilities. " Many tend to be slovenly and messy in their personal habits; they demand privileges not in the contract; they leave lighted cigarettes where there are no ashtrays, and leave the flushing of toilets to lesser beings. Landlords do what they can to avoid renting to them, but if they say "I'm evicting this person because she has dirty habits" they will be told "No, you're trying to evict her because she's on welfare, and that won't work."

New regulations are constantly intro duced to make ownership of rental property more burdensome. Every door (in some states) must be equipped with a large metal rod on a spring so that it will automatically close in case of fire. (This costs about $50 per door.) With new regulations being con tinuously enacted, the landlord's margin of profit, already precarious, often disappears entirely. Moreover, it profits the tenants to break some pipes or destroy some electrical fixtures because they don't have to pay rent until these are repaired. 4 Meanwhile a new state law (inMinnesota, for example) specifies that if the owner does not pay his entire property tax in the year it is due, the entire property can be confis cated the following year. (What happens if the owner has a bad year? The government confiscates the property, and may operate it at a loss, payable by taxpayers.) 3. Mining In a recent Roper public opinion poll, people were asked their opinion of each industry. Of 222 industries, mining ranked next to last; only tobacco fared worse.5 But mining was, and is, more heavily regulated in the United States than in any other industrial nation.

Mitsubishi Corporation of Japan decided to build a new copper smelter in Texas City, Texas. Japanese officials were assured by state and federal officialsthat all the relevant permits would be issued in 12 to 18 months. The first application was submitted in June of 1989. Then came three years of conflict among environmental groups, permitting agencies, and company management. Air and-water discharge permits had to be ob tained; the U.S. Army Corps of Engineers had·to issue its own permit; and an assort ment of permits from state, county, and city agencies were also required-more than thirty in all. The Army Corps of Engineers promised a decision within sixty days, but waited 21 months. Exhausted by the attrition, Mitsubishi finallycancelled the project. The new chair man of the Texas Water Commission said that when his permit came up for review in four years he would demand zero discharge of waste water-technically a virtually im possible demand. The air discharge permit from the Texas Air Control Board would take most of a year; building the plant would take another two years, and less than a year after that the company would be faced with the zero-discharge requirement. For these reasons Mitsubishi abandoned the project in March of 1992. They decided to build the identical copper smelter in Japan, where all the required permits were obtained in 14 376 THE FREEMAN • JULY 1994 days and the plant was built in 17 months.

The president of Key Metals and Minerals Engineering Corporation, Dr. Thomas Mackey, wrote, "This action ended a mar velous opportunity for the U.S. to acquire a minimum-pollutionenergy-efficientmodern copper smelter which would have been strategically located on the Gulfof Mexico's coast. ... ,,6 As a result of this and numerous similar incidents, Japan is ahead of the United States in the development of mining tech nologY. For many years the United States was a net exporter of copper. Today the United States has been surpassed in copper production by Chile. Gradually we are be coming non-competitive. In 1992 the Congress passed a bill which may seem trivial by itself, but taken together with a mass of similar ones, is a significant straw in the wind on the future of mining in America. As a result of the new legislation, whenever your company buys an electric motor you are now required to buy "the most efficient" one: 96 percent efficiencyis now mandated, whereas the earlier require ment was 94 percent. So what, one might say-what's a difference of 2 percent? The catch is that it must be 96 percent-efficient when operating at full speed. The 96 per cent-efficient motor is more efficient at full speed, but it has less starting torque. In fact a conveyor belt could never get started with the newly required motor. But since the 94 percent-efficient motor is no longer permit ted, users must now go from a 96 percent efficient motor of 100-horsepower to one of 200-horsepower, just to get the motor started.

Once the 200-horsepower motor is run ning, it doesn't require all that extra ener gy-it can easily do with 100. But since the 100-horsepowermotor that would do thejob is now outlawed, it is necessary to use the 200. The extra energy is wasted, but no other option exists that is not illegal. By contrast, Japan can still use the 94 percent efficientmotor. American equipment willbe more inefficientand more expensive, thanks to many laws such as this one. The new law. does not save energy-it requires industry to waste energy. It does its bit to make the United States non-compet itive. It is assisting the gradual process of de-industrializing America. Conclusion Regulation-actually, more suitably called "prohibition"-of limited scope is necessary to prevent people from harming other peoplethat is, when one person or group would otherwise violate the rights of others. But the vast majority of today's regulations are not of this kind, but could better be called regulation for regulation's sake. It is these that are eroding America's industrial base and makingthe United States . increasingly non-competitive in the world economy.

It was not always so: America today would be unrecognizable to those who lived here a century ago, thanks to the labor and ingenuity of many thousands of productive individuals-inventors, manufacturers, merchants, farmers, and countless others employed by them and associated with them. But in the last half century an oppos ing force has gathered momentum, threat ening to bring these productive advances gradually to a halt. The conflict is between those who have created this vast array of goods and services, and those whose aim is to control the creators. Will the economies of other nations, not as burdened as ours by harassing regulations, replace the United States as the economic leaders of tomor row? At present it is far from clear what the outcome will be. D 1. Jeff A. Taylor, "Species Argument," Reason, January 1994, p. 53. 2. Ibid., p. 52. 3. See William Tucker, The Excluded Americans: Home~ less and Housing Policies, Regnery~Gateway, 1990,Chapter 4.

4. Albert Lee, Slum~lord, Arlington House, 1975. 5. Engineering and Mining Journal, December 1993, p. 14. 6. Ibid., p. I&B.